Selling and buying a boarding house in NSW – tips and traps

Owning a boarding house can be an exciting investment opportunity but it is important to do your due diligence. With developers and investors turning their heads to boarding houses, we look at the tips and traps involved in this market.

What is a boarding house?

A boarding house provides residential accommodation. For a fixed fee, a resident in a boarding house has a right to occupy a room and share other common facilities with other residents (e.g. kitchen and bathroom).

The terms are set out in a written occupancy agreement between the owner and the resident.

Residents in a boarding house do not have the same legal rights as tenants under the Residential Tenancies Act 2010.

There are two types of boarding houses:

1. General – these accommodate five or more paying residents (but do not include hotels, motels, backpackers’ hostels, aged care homes); and

2. Assisted – these accommodate two or more persons with additional needs, being a disability such as an age-related frailty; a mental/intellectual illness; or other physical disability which requires support or supervision with daily tasks.

What laws govern boarding houses?

The Boarding Houses Act 2012 and Boarding Houses Regulation 2013 set out the different types of boarding houses, rights of residents in a boarding house, the inspection powers for local Councils, and the requirement to register boarding houses on a public register.

Do you pay land tax when you own a boarding house?

Enquiries should be made with Revenue NSW as to whether there are any available land tax exemptions applicable to the boarding house in question. For example, some boarding houses may be exempt from land tax under section 10Q of the Land Tax Management Act 1956 which applies to land used and occupied primarily for low-cost accommodation.   

Do you pay Goods and Services Tax (GST) when you buy a boarding house?

Because a boarding house is essentially residential premises, this may lead you to assume that the sale of a boarding house does not attract GST because the sale of residential premises is typically input taxed (meaning the price does not include GST).

However, boarding houses come within the definition of “commercial residential premises” in section 195.1 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and section 40.65(2) confirms that the sale of commercial residential premises is not input taxed. 

Accordingly, the sale of a boarding house will be a taxable supply unless it is a sale of a going concern.

For it to be a sale of a going concern, the conditions set out in section 38.325 of the GST Act must be satisfied, namely:

1. the sale of the property must be for consideration

2. the purchaser is registered or required to be registered for GST

3. the vendor and the purchaser agree in writing that the sale is of a going concern

4. the vendor supplies to the purchaser all of the things which are necessary for the continued operation of the boarding house enterprise

5. the vendor carries on the boarding house enterprise until the day of completion of the sale.

Any other things to consider?

A prudent purchaser should also consider the following:

1. arranging for a building and pest inspection of the property before entering into a contract for sale

2. searching the records of the local council to check whether there are any outstanding notices or orders which have been issued in respect of the property requiring work to be done or money to be spent and also whether consent was granted by council for the use of the property as a boarding house

3. making enquiries with the vendor as to whether there is a current Fire Safety Statement in respect of the property and whether there are any disputes with neighbours (e.g. in relation to trees or fences)

4. requesting copies of any occupancy agreements from the vendor (if they are not included in the contract for sale); seeking confirmation that there are no existing breaches of those agreements and whether there are any security deposits held

5. searching the NSW Fair Trading register to check whether the boarding house in question has been registered by the vendor.

Conclusion

The purchase or sale of a boarding house is not straightforward. Mistakes can be costly.

If you are considering the sale or purchase of a boarding house, don’t hesitate to get in touch with our Property, Planning and Construction team who can assist you with the process.

If you have any questions regarding this article, please contact Andrew Grima.

Author: Irene Horan